Citi analysts flag 'real risk' of Macy's dividend cut, shares tumble

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CHICAGO (Reuters) - Shares in Macy’s Inc (M.N) tumbled more than 5 percent on Monday to a seven-year low after Citi analysts said the department store operator may cut its dividend to help pay down debt as it grapples with weak margins and foot traffic.

An exterior of a Macy's department store in Pasadena, California May 12, 2015. REUTERS/Mario Anzuoni

U.S. department stores have struggled with several quarters of declining sales and aggressive competition from off-price retailers as well as Amazon.com Inc (AMZN.O).

Macy’s has not found the right tools to bring more customers through its doors or improve its margins this holiday shopping season, and the company’s management has indicated they want balance sheet flexibility to weather a downturn, Citi analysts wrote in a research note.

“We believe there is real risk that the dividend could be cut in the future in favor of paying down debt,” the analysts wrote.

Citi also slashed its target price on Macy’s shares to $16 from $21 and cut its rating to “sell” from “neutral.”

Macy’s declined to comment on the Citi report.

Chief Financial Officer Karen Hoguet said in June that Macy’s full-year gross margin this year could be 60 to 80 basis points lower than in 2016.

The company, which also owns luxury chain Bloomingdale’s, has been trying to turn itself around this year by closing underperforming stores, revamping its beauty business, building up its Backstage discount business and improving its e-commerce site.

Macy’s stock, which has lost about 45 percent of its value since the start of the year, was last down about 4.6 percent at $18.79 in afternoon trading.

Citi also downgraded its rating on J.C. Penney Co Inc (JCP.N) to “sell” from “neutral” and halved its target price on the stock to $1.50.

J.C. Penney had shed about a quarter of its market value on Friday as it slashed its full-year sales and earnings forecast after selling stagnant inventory at heavy discounts.

Shares in J.C. Penney were last down 9.5 percent at $2.82 on Monday, adding to losses from last week.

“J.C. Penney’s strategy has not gained traction in any cohesive way and we do not see things getting any easier in this environment,” Citi analysts said.